Coors leaves investors feeling light

Stock watered down by inventory, earnings concerns

WilliamSpain

That's the question investors looking at Adolph Coors Co. are facing as the summer beer-drinking season gets into full swing.

While the beer business is fairly healthy at the moment, a full inventory, increasing competitive pressures and weak early-year demand recently have combined to drive the stock down to 52-week lows.

On Tuesday, shares rose 19 cents to close at $50.55. The stock
AVC, +0.00%
hit a 52-week high of $82.31 just after Christmas and dipped as low as $48.87 last week.

Coors has "a number of company-specific issues that have impaired the stock," said analyst Skip Carpenter of Credit Suisse First Boston.

Among them are a weaker-than-expected demand for beer in the first quarter, along with "some very difficult comparisons" from here on out.

"Brewers typically build inventories going into the summer selling season," Carpenter added, while Coors is still being forced to work down its inventory.

Part of the stock stagger can also be traced to a hangover from its previous highs, Carpenter explained. Coors ran up late last year as part of a "flight to quality, when people were moving into defensive equities" only to get hit by "concerns that earnings disappointments could materialize."

Cautionary note

In April, the company posted first-quarter net income of $18.3 million, up nearly 24 percent over the year-earlier period, while earnings per share climbed to 49 cents from 40 cents in the first quarter of 2000. That EPS figure solidly topped the First Call/Thomson Financial consensus estimate for 45 cents.

Still, the company sounded a cautionary note at the time, warning of high wholesale inventory levels, while Coors Brewing CEO W. Leo Kiely pointed out the difficulty of predicting "what impact weather, the economy and other industry-related factor will have on our business" for the balance of the year.

The company declined repeated requests to be interviewed for this story, citing "a quiet period" as it prepares to release second-quarter numbers late next month.

Following its first-quarter earnings, Coors was smacked by a number of analyst downgrades and lowered estimates. It is now expected to earn $1.42 in the second quarter, a penny below last year, and $3.22 for all of 2001.

With market share of approximately 11 percent, Coors is the nation's No. 3 brewer - a distant third behind mighty Anheuser-Busch
BUD, +0.87%
at nearly 50 percent, and Philip Morris
MO, +1.39%
unit Miller Brewing's 20 percent. Its Coors Light brand, a.k.a. "the silver bullet," is the No. 4 beer in the U.S. The company also makes and markets Keystone, Zima and George Killian's and owns just under 50 percent of Molson U.S.A.

The company has long had to play catch-up with the big boys (it has only been 10 years since it achieved distribution in all 50 states) and is on the defensive because of its rivals' economies of scale and marketing clout.

Family ties

All Coors' voting stock is controlled by members of its eponymous founding family, which also owns about a third of the nonvoting shares. Adolph Coors Co. is essentially a "shell" parent, with Coors Brewing as its only subsidiary. Peter Coors, grandson of Adolph, is chairman of the brewing subsidiary and CEO of the parent company -- a title he picked up last year from his octogenarian uncle William.

By most accounts, much of the company's success over the past few years -- particularly in defusing consumer concern over his family's support of hard-right political causes, the Heritage Foundation and boycott-provoking employment practices -- has been driven by the younger Coors.

More important to the bottom line, "from a business perspective, they have come a very long way in a short period," said Marc Greenberg, an analyst with Deutsche Banc Alex. Brown. "Management has addressed what I think are a number of their structural business problems."

As evidence, one need look no further than the company's top seller, he said. "Coors has nowhere near the scale or operating efficiencies of an A-B or Miller, yet their Coors Light brand is as strong any other out there."

The company's relative lack of diversity and overreliance on one brand is both a blessing and curse, he added.

"When you are levered to one brand and you produce 85 percent of your beer in one brewery, when the industry is going well, it has a stronger impact on earnings," Greenberg said. "But when the industry trends are not universally good, as a small player, you tend to feel the pinch a little more."

Lacking a catalyst

Long term, Greenberg said, he believes that Coors "has its arms around the key issues" but with competitive pressures mounting and "volume growth not likely to be very strong, its earnings and stock price are not going to go a whole lot higher in the next six months."

Greenberg maintains a "neutral" rating on the stock with a target price of $59: "It is attractively valued but lacks a catalyst."

Carpenter is a bit more conservative. He has "aggressively lowered" his profit estimates, chopping his expectations for 2001 EPS from $3.37 to $3 following Coors' first-quarter results. His target price is $53 to $55.

"We need to see consumer demand return to work down their inventories, " he said, and with 50 percent of the company's profits coming in the second quarter, the excess of suds on hand arrived "at a difficult time," Carpenter said. "All brewers are very reliant on the second and third quarters, but Coors does have a higher exposure."

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